Why Netflix is Moving our Cheese

Last week, Netflix announced new pricing structure to split online streaming and DVD delivery into separate plans. So instead of paying a minimum $10 per month for both, users will pay at least $8 per plan, for a total of $16 to keep both plans. Netflix’s 60% price increase has sent shock waves through its user community. To date, there are over 5000 comments on Netflix’s official blog, over 70000 comments (including multiple comments from same users) on its Facebook page, with plenty of complaints going around.

Netflix’s response is cool and almost indifferent. “We knew there would be some people who would be upset,” said company spokesman Steve Swasey, when commenting to MSNBC. “To most people, it’s a latte or two.”

Netflix is profitable, its stock price has also sky rocketed in recent years. There seems to be no urgent need to “fix what’s not broken”. So why the sudden change? Why risk alienating its most valued asset – its customers? And why now? Many questions remain. One answer is clear – Netflix does not stand still. It does not wait for change to happen; it simply brings change to the world. And in doing so, Netflix writes its own rules for the game. The dramatic increase is indicative of Netflix’s ambition and its bold business strategies. Whether successful or not, it’s a gutsy move.

To see why Netflix can afford to make such a widely unpopular move, let’s first let’s look at why Netflix can increase prices. The numbers are important here. Netflix has 23.6 million subscribers as of Q1 2011, representing a 21% penetration rate. More impressively, it has enjoyed a churn rate of less than 4%. People love Netflix because it is simply the best deal out there. Even after the price increase, Netflix still delivers the best value for home entertainment dollars. We know it, Netflix knows it. Even if it loses a quarter of its user base, it will still come out far ahead in turns of revenue and profit.

Secondly, the price increase may not hurt as much as it sounds. The price is very inexpensive to start with. The relative number here (60%) causes more outrage than the absolute number which is $6 per month. Most cancellation cries are more emotional than economical. After some cooling off, subscribers on tighter budget are more likely to keep one of the plans.

Timing is also important here. Angry users rushing to cancel service quick found there is a big problem: there just isn’t a better alternative out there. Blockbuster’s DVD plan is more expensive and doesn’t include streaming. Amazon’s streaming plan is cheaper but has a much smaller selection. Netflix couldn’t have picked a better time to minimize users defecting to its nearest competitor, as Hulu is rumored to have been put up for sale. Redbox is a potential winner here, as more Netflix users are expected to keep online streaming, and use Redbox as a complimentary DVD service. Redbox is never a threat to Netflix though. Again, a rational analysis by most consumers can lead to only one conclusion: keep Netflix.

There is nothing more strategically important for Netflix than its continued ability to acquire better and more content. The price increase is designed to further propel Netflix forward in the race to become the nine hundred pound gorilla in home entertainment. With its current content offering, it will only be a matter of time before the next competitor catches up. Hulu is getting there. Amazon, Google and Apple all have deeper pockets to get there. Only with a higher per subscriber revenue stream, can Netflix afford to upgrade its service offering, both in terms of content and infrastructure quality. While Netflix expects to lose a percentage of its user base, it hopes to gain more in the future, by value of its offerings.

Technically, the move is a welcoming one. With its rapidly increasing user base, Netflix’s quality has often suffered as infrastructure struggles to keep up. The lower cost of current pricing model also meant Netflix has to limit per user spending to remain profitable. With the temporary slowdown, Netflix can focus on servicing a slightly smaller customer base better, leading to better user experience and high quality services. Separating streaming from DVD also makes business sense, as the infrastructure cost is totally different. Other than content, DVD cost is mostly postage, which is linear. Streaming cost, on the other hand, requires capital investment in infrastructure, as well as long term financial contract with CDN vendors. Over time, Netflix is more likely to allocate more resources to streaming which is a much more lucrative growth market.

The initial reaction is probably as expected. The revelation will come on Sept 1st, when the price increase becomes effective for current subscribers. Netflix must be watching numbers by the day, if not by the hour. Netflix will probably consider this move successful if it loses less than 10% of its user base as a result of the price increase. Netflix may be taking one step back now, but it is hoping to take many steps forward in the future. While consumers may be upset, a year from now, we may find our cheese still has the familiar red label on it.

Sean has degree in Electrical Engineering, worked on some of the earlier dotcom media sites, currently working in enterprise internet infrastructure and IP networking.
Born in Shanghai, Sean hopes to combine his technical knowledge, bridging capabilities, and join the digital media community to explore new online innovations.

My problem is the fact that not everything is available to stream, which is the only reason I pay for dvds. If they were going to make everything available to stream I would be estatic because I’d switch from 2 dvds out to just streaming and cut my bill in half.

Honestly, Netflix new pricing is perfectly fair and only those who don’t realize that netflix was essentially giving them stuff for free are upset. Think about the postage for ONE, just one back and forth mailing. Think about how much they have to spend in the next year to sign new licenses. What were they supposed to do, nothing?

The “this will hurt them” talk all over the news is JUST NEWS. They are raising prices 60%. They would have to loose 40% of their subscribers for this to blow up in their face. Do you actually think 40% are going to just walk? Maybe…..maybe 5-10%. So how exactly are they screwed?

Interesting take on the company, but the real facts are there is a very good reason Netflix brought the move about.

“Netflix is profitable, its stock price has also sky rocketed in recent years. There seems to be no urgent need to “fix what’s not broken”. So why the sudden change?”

Netflix’s CEO Read Hastings legend is that he formed the company after taking back a misplaced DVD to blockbuster and was charged a fee more than what the DVD was worth. He vowed never to pay a late fee again and Netflix’s was born.

This guy is not out to gouge anyone, besides he has more money now than God, but like anything else when other people see you making money they want their cut. Netflix’s initial 5 year contract with STARS was $30 million dollars a year. When that contract expires this year they are expected to be shafted with a $300 million dollar a year renewal.

The Wall Street Journal reports another $70 million is sent to be spent as part of its Latin America expansion.

With the US Postal Office struggling with debt and debating dropping off Saturdays, how long do you think it will take until another postal hike happens? They have already threatened Netflix with an individual tax because of their oversized envelopes.

In the long run everyone who helped build Netflix will Zombie out and start eating her. Personally I hope its just $6 bucks more. Everyone knew they were getting an amazing deal and even after the jump its pretty hard to complain… for a couple gallons of gas you get a months worth of service.

I have been a loyal Netflix subscriber since 2002, after Blockbuster ripped me off (big time) for a late fee. Since that experience, and because Netflix has provided good service, I have never even thought about taking my business elsewhere, until now. Here are the most outrageous replies from Netflix so far: “We knew there would be some people who would be upset,” said company spokesman Steve Swasey, when commenting to MSNBC. “To most people, it’s a latte or two.” AND “30,000 or so is a sub set of 23 million subscribers. They’re not speaking for the majority.” First of all, “a latte or two”? How elitist can someone be? Secondly, I have tried four times (so far…) to call Netflix and can’t get through, probably because so many other people are complaining. So, the number is not 30,000….it is HIGHER. As part of the cheery email from Netflix about their price hike, it said: “We realize you have many choices for home entertainment, and we thank you for your business. As always, if you have questions, please feel free to call us at 1-888-357-1516.” Great! Except there are too many other people calling (that is, complaining) using that 888 number. So I can’t get through. A 60% hike?!? What were they smoking? That must have been “some” marketing meeting when Netflix came up with 60% as a fair price increase. Sure, of course… While the economy is hurting and a lot of people are struggling. I see that all time, 60% price hikes for the SAME service, very common……. I read somewhere that there is some negotiating with Starz now, which may cost Netflix a little more money. So what?!? If Starz does not want to negotiate a fair price, why doesn’t Netflix tell Starz to just take a hike? If Netflix raised their price by a “reasonable” amount to pay more to Starz and others (i.e. NOT 60% for the plan that I am on) fine I could live with that. But I can’t live with getting “kicked in the teeth.” Luckily, there are other places where I can take my business.

Tim,
Its not just Starz will cost a little bit more, try a lot bit more 30 to 300 is a thousand times increase. Look I’m not happy about the increase either but everything is relevant. 60% hike in your internet bill would be 30-40 bucks, were only talking about 6 bucks here. I was a subscriber from the beginning myself. I doubt if you were because you would remember that Netflix “just for DVD’s” use to be 12.99 a month. They lowered there plan multiple times, but not one remembers that.

I just joined Netflix in January with a streaming-only subscription ($8.75/month), so I found out about all of this well after the fact (streaming-only subscribers got no email notice). I never had any intention of subscribing to the DVD option, but I can definitely see both sides. Yes, it was handled badly, but really they were charging too little considering all that postage, etc. Streaming still needs some work as far as titles available, but I have found everything Netflix didn’t have streaming on my Apple TV (which is what I use to watch Netflix) through iTunes, so I still have click of a button access to just about every movie I could possibly want to see without dealing with physical DVDs. Perhaps Apple will see a jump in ATV purchases as a result of this move by Netflix, since a lot of us don’t want to deal with DVDs and prefer our entertainment electronically delivered.

I agree Heather the latest movies are few and far between on Netflix, for myself I dropped my Cable/Satellite and just use my rooftop digital antenna for local channels and the ROKU box and never looked back. I mainly use Netflix to catch up on TV. Stuff that I didn’t even knew existed when I had Cable because it was never in my “time slot” to be able to watch; full seasons without commercials, you can’t go wrong with that. So I figure I’m saving myself about $40 bucks a month. I don’t know what Apple charges, but I rented a couple Amazon movies for 4.99 a pop.

I still think Netflix is still the best deal out there and for the extra 20cents per day, I think I can live with it.

[…] week. By jacking up prices by as much as 60 percent on its unlimited streaming and “DVD by …Why Netflix is moving our cheesePress X to Not Die: Netflix price increase a slap in the face to consumersIs Netflix killing DVDs […]

Netflix started as a DVD only company, any successful business has to evolve over time. Judging from attending a recent conference, work on near real time streaming is active in the industry. Going back just a few years, how many people would have thought online streaming could be as good as they are now? It will get better.

I love HD over antenna too, but it’s got limitations in content and availability.

Fahq Netflix; Customer service is not important to the company as seen as far back as 2005. This is when they became too big for their own good, and now it’s just becoming apparent to a larger audience. For those not complaining or agree with the price hike you must be share holders or have some interest in the company. Also Netflix never gave me anything for free; I paid my dues and received what I was told I would get for my money. It used to be money well spent too, but lets face it as prices go up steadily I have many other options for home entertainment that cost far less and offer just as much QUALITY T.V. shows as Netflix does. Netflix customers have to wait 30 days for new releases, Starz sucks so I could care less if they sign another deal with them, and I can’t stream anything new that’s actually worth watching (I don’t want to watch old crap or things I’ve seen a million times over either). I refuse to throw more money Netflix’s way each month for the same crap. I realize my measly $’s won’t hurt them when lost in the long run, but I hope that many more than expected leave with me September 1st. I seriously can’t wait for the next big entertainment company to come in and destroy Netflix. For those of you that think Netflix is indestructible please look back at how many giant corps. have failed in the past; I’m sure not many or any of you out there saw Blockbuster’s bankruptcy coming before Netflix and Redbox came along. A price increase when the economy is in dire straits is a stupid move for any corporation no matter what it’s selling. If you disagree you’re either a moron or have way too much bloody money and time to waste!